By another name, “How to Escape the High-Pressure Financial and Lifestyle Hamster Treadmill.”
Here is a financially successful husband and wife who have a combined annual gross income of $500,000 per year as W-2 employees. I intend to compare their choice of living in San Francisco/Silicon Valley, California as a high tax and high regulatory state and Casper and Wyoming as a low tax and low regulatory state.
There are cost differentials between living in California and anywhere else that you want to compare. The couple’s work product can be accomplished with online connections to the main office. Only occasional office visits are necessary.
I am using Wyoming as my example location. Interested movers may find other low tax, low regulatory locations more suitable for them.
This is a fictitious family, so I am making some factual statements and some assumptions that are illustrative. My assumptions, however, are based on research and inquiry. The family consists of a successful husband and wife, 2 kids, living in a nice home for the area. They have 2 dogs, 2 cats, a Jeep Sport Utility, Range Rover Sport Utility, and of course a Harley-Davidson Sport Glide motorcycle. The working husband likes to deviate from the mundane responsibilities of his corporate job by pretending to live a renegade lifestyle while riding out on the roads with his Harley in the backcountry. You just never know when he and his buddies may come upon a sleezy biker bar with good beer and hamburgers.
Both the husband and the wife each earn $250,000 per year. Their combined family income is $500,000 a year before federal, state, local taxes and living expenses. They have daycare expenses. If they live in San Francisco/Silicon Valley California their home would be worth at least $2 million with a $1.5 million mortgage fixed rate at 4%, monthly payment of $7,161. amortized over 30 years. For Bay Area pricing $2 million will not purchase any more than a standard 1,200 to 1,500 square foot frame stucco 50-year-old home, usually not upgraded. Square footage purchase prices will range from $1,500 to $2,358. Finding a 1 or 2-car garage is a luxury.
If they moved to Wyoming, they could get a comparable home for way under $1 million with a $750K mortgage with a substantially reduced monthly house payment. I reviewed a for-sale very modern appearing home with acreage of .71 for $897,000 with 5-bedroom, 5-bath, 5,632 sq. ft. built in 2013, with a 3-car garage and large yard. The price per square foot was $159 compared $1,500 to $2,300 price per square foot in San Francisco/Silicon Valley, California.
I estimate the difference in the prices of goods and services as 100% for the high- cost state of California and 62.5% for low-cost states such as Wyoming, including cost of daycare. Assume that this family spent at least $60,000 in the year in CA and $40,000 per year in WY on all taxable goods and services for purposes of calculating sales and use taxes paid.
Consumer cost-of-living comparison between SF, CA and Casper, Wy.
Many business owners use corporate or pass-through entities, or combinations thereof. Examples using business entity strategies and/or multiple entities are more complex than I have intended for this comparative illustration. Therefore, I have not addressed income and tax implications of business ownership entities. An obvious response is to consult your accountant or CPA for more complex examples.
My comparisons relate to relative pricing ratios, which will be exacerbated when we also notice that Wyoming has “0” state income tax, 4% sales tax, and only .61% property tax. Also, these comparisons will be exacerbated when we also compare the differential between homes prices, family related expenses, and cost of goods and services. For example, a gallon of gas ($3.50 gal. in CA, and $1.95 gal. in WY) consumer goods (35 to 50% cheaper), insurance coverage (35-40% cheaper), or cost of utilities, etc.
For a comparative tax calculation, we need to differentiate between “marginal” and “effective” tax rates. The marginal rate is the highest dollar tax rate earned. In my example, the highest dollar is $500,000. The effective rate is calculated, overall considering all the tax deductions will be the actual percentage that you owe the IRS. “Effective rate = income tax / income earned before taxes.” The US tax system is a progressive system, meaning that the more you earn the higher percentage of taxation you pay, from a low of 10% to a high of 37% for federal income tax.
This couple’s Federal tax obligations for individual taxpayers that apply to all states located in the USA:
1. Income tax (federal) for married individuals filing joint tax returns for the combined income of $500,000. = $102,115.
2. Social security (federal) (FICA) = $ 17,074.
3. Fed-Medicare (federal) = $ 7,250.
4. Additional Medicare (federal) = $ 1,905.
5. Summary of Fed taxation: $102,115 (Fed income) + $17,074 (Social Security) + $9,155 (Medicare total) = $129,004 (TOTAL ANNUAL FEDERAL TAX OBLIGATION)
6. Excludes calculations for tax deductibility of home loan interest and property taxes, alternative minimum tax, earned income tax credits, childcare tax credits, and annual exclusions for gifts.
California State Tax obligations and cost of living expenses:
1. CA-State income tax rate- income $500,000 = $33,387.
2. CA-Sales and use tax rate of 7.25%. Local jurisdictions may add an additional 1% making the effective sales tax rate 8.25%. Assuming this couple spent $60,000.
3. 60,000 at 8.25% annual on taxable goods the state sales tax would be $4,950.
4. CA-State disability tax (SDI) Currently the maximum is $2,458.
5. Summary of CA taxation: For the above a W-2 employee(s) total annual state taxes with combined income of $500,000= $33,387 (State) + $4,950 (State sales tax) + $4,950 (SDI) $2,458 all combined will be $45,745 (CALIFORNIA COMBINED TAXES)
6. CA-Unemployment tax for employees paid by employer
7. Employees may have additional withholding for retirement or pension plans.
8. Employees may be pressured to make donations to charities and labor unions.
9. CA-Additional wealth tax currently under consideration: California governor wants a new surcharge on wealthy persons called the “millionaire tax,” or “wealth tax.” Various “socialist” proposals are now under consideration. AB 1253 would tax surcharges of 1% to incomes (jointly or single) for incomes between $1 million and $2 million, 3% on incomes between $2 million and $5 million, and 3.5% for incomes greater than $5 million. This socialist scheme increases one’s state tax obligation up to 16.8%. Of course, just squeeze the rich of all you can get. For our couple, their would be no new wealth tax. This new tax will impact 70,000 taxpayers in the state. This bill has not passed into law yet.
10. CA-Property tax will be 1.25% of purchase price of $2 million or $25,000.
11. Before the successful young couple pays their living expenses, house payment, groceries, children upkeep, and day care, federal, state and property tax:
a. FEDERAL TAXES $129,004 b) CA-STATE TAXS $45,745
12. CA – Estimated annual family living expenses.
a. House payment $7,161.23 per month or $85,934 annually
b.Utilities, insurance, homeowner association dues and maintenance = $4,000 per month or $48,000 per year.
c. Food, clothing, and entertainment = $4,000 per month or $48,000 per year
d. Medical insurance for a family of four- average in Calif $4,173 per year times 4 family members or $16,692 annually.
e. Car payments, gas, and maintenance for 2 cars $4,000 per month or $48,000 per year.
f. Pension contribution $1,000 for husband and wife or $24,000. per year
g. Charitable giving 1% or $5,000 per year.
h. Day care of $2,000 per month or $24,000 per year.
i. Life and disability insurance $15,000 annually
j. Savings account contingency fund $1,000 per month or $12,000 per year.
13. This financially successful couple pays $326,127 in California annual living expenses. If you exclude the pension contribution of $24,000 and annual saving plan of $12,000 the total cost to live is $297,127. These combined annual living expenses do not include their federal and state tax obligations. We are assuming a nice lifestyle commensurate with their high-income level.
14. Even a family who lives in California making $500,000 per year may be forced to live on the edge considering all related expenses. This example shows that this family which is financially successful and tries to live accordingly has net after taxes $300,251/$326,127 living expenses. They are upside down. They are spending $25,876 more annually that they make.
15. There are choices for remaining living in California? They can make more income, cut back on expenses, cut the pension contributions, and saving portion, accumulate credit card debt to finance the difference, or move out of state. In certain respects, some financially successful families in California are forced into renting their lifestyles.
16. One of C. Northcote Parkinson’s laws that he wrote about in his book Parkinson’s Law published in 1957, was “expenses will always rise to the level of the income.”
17.The above figures are estimates. Consult your accountant for help in your circumstance. Consult your psychologist if you experience severe frustration when you get the answers. Consult your local moving company when you refuse to take it any longer. Outbound movers are currently terribly busy, so you must schedule one.
Wyoming State taxes obligations and cost-of-living expenses.
1. Ranks 48th out of 50 states for extremely low tax obligations.
2. Zero state income tax.
3. WY-State sales tax 4%. Certain counties may add up to 2% extra, but Wyoming has the ninth-lowest effective rate. Assume that they spent $40,000 on taxable items at 6% or $2,400.
4. WY-Property taxes average effective rate of .61% or a little over ½ of 1%. In this example, the house is $1 million X .61=$6,100 per year.
5. Wyoming does not use a state withholding form because there is no personal income tax.
6. WY-Unemployment SUI rates range from .18% to 8.72% for the employee.
7. The employer pays 1.22% to 2.35% in 2020 for contribution to the State unemployment fund.
8. No State Disability insurance (SDI).
9. If they live in Wyoming, before the successful young couple pays their living expenses, house payment, groceries, children upkeep, and day care their total federal, state and property tax, adding up a combination of federal, state, and property taxes will reflect their net:
a. Total Fed taxes $129,004
b. Wy state income tax “0”
c. WY property tax $6,100
d. WY sales tax =6% X $40,000= $2,400
e. Combined CA and WY federal and state taxation of $137,504 or 27.5% tax bracket.
f. 72.5% of their earnings or $362,496 is left after paying Fed and State taxes to pay annual family related expenses,
g. Plus, a significant amount left over for investments.
10. Their tax bracket is reduced from CA-40% to WY-27.5%. They keep an extra 12.5% per year due to reduction of federal and state tax paid. This is like an increase in pay of $5,208. per month, family cash flow or savings before you compare the living expenses between these two states.
11. Wy- Estimated family expenses except for the house payment are calculated at an average of 62.5% of San Francisco/Silicon Valley cost. You may review cost-of-living comparisons on the website cited above. Many expenses will be 50% or less, such as day care and gasoline.
a. House payment $3,580 per month or $42,968 annually.
b. Utilities, insurance, homeowner association dues and maintenance = $2,500 per month or $30,000 per year.
c. Food, clothing, and entertainment = $2,500 per month or $30,000 per year.
d. Medical insurance for a family of four- average in Wy $ per year times 4 family members or $10,432 annually.
e. Car payments, gas, and maintenance for 2 cars $2,500 per month or $30,000 per year.
f. Pension contribution $1,000 for husband and wife or $24,000 per year g) charitable giving 1% or $5,000 per year.
g. Day care of $600 per month or $7,200 per year
h. Life and disability insurance $12,000 annually.
i. Contingency fund for savings $1,000 per month or $12,000 per year.
12. Their total Wyoming annual living expenses excluding their pension plan contribution and savings plan is $167,600. If you include the pension funding and savings of $36,000, then the total increases to $203,600 or $16,967 monthly combined expense.
The bottom-line comparison of annual cost between living in San Francisco/Silicon Valley California or moving to Casper Wyoming is that the couple would save in reduced living expenses excluding pension contribution and saving contribution (CA $297,127- WY $167,600 or $129,527) and savings from reduced In federal and state taxation (CA-199,749 – WY $137,504 or $62,245).
COMBINED ANNUAL LIVING ESPENSE SAVINGS AND SAVINGS FROM REDUCED TAXATION TOTALS ($129,527 + $ 62,245 = $191,399). DIVIDING TOTAL NET SAVINGS BY 12 = $15,949. DOLLAR DECREASE IN OUTGOING PAYMENTS EACH MONTH BY MOVING OUT OF THE STATE. OR LOOK AT IT AS AN INCREASE IN CASH FLOW THAT YOU GET TO KEEP ALMOST $15,949 PER MONTH.
ANNUAL CASH SAVINGS OF $12,000 COULD BE ADDED TO YOUR PENSION FUND CONTRIBUTION OF $24,000 ALL TOTALING ($ 24,000 +$12,000 + $129,527 = $165,527) THAT YOU GET TO KEEP IN YOUR POCKET. THIS COULD BE INVESTED AND ACCUMULATED FOR EARLY RETIREMENT. IF YOU INVEST $165,527. IF YOU INVESTED $165,527 AT THE END OF YEAR 1 AND CONTRIBUTED AN ADDITIONAL $165,527 AT THE END OF EACH YEAR FOR 10 YEARS, WITH ALL YIELD REINVESTED YOUR ACCUMULATED INVESTMENTS COULD GROW TO $3,099,283. BY COMPOUNDING YOUR MONEY COULD GROWER EVEN MORE.
This additional savings could also finance a vacation condominium anywhere in USA that your family desired and lots of first-class vacations.
As a note of interest, this couple may prefer living in Jackson Hole, Wyoming, but the living cost would be higher than Casper. Jackson Hole is a wonderfully beautiful town with popular culture. Many film sets have been shot there. It is also home of the Jackson Hole Economic Symposium sponsored by the Federal Reserve of Kansas City and held annually. Jackson Hole is located within the Grand Teton National Park, one of the most spectacular awe-inspiring places in America. Jackson Hole is one of my very favorite locations in the entire country.
Consumer cost-of-living comparison between SF, CA and Jackson Hole, Wy
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